Monday, July 14, 2014

Cameron K. Murray — Krugman vs Bank of England (or QE bails out the rich)

Here’s how the Bank of England summarises the effects on wealth from quantitative easing. 
"By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets."
Which is the exact opposite of Krugman’s point, since he overlooks the prices of assets altogether. And now the BoE’s take on how QE and low interest rates have affected bond holders. 
"By pushing down gilt yields, QE has reduced the annuity rate. But the flipside of that fall in yields has been a rise in the price of both bonds and equities held in those pension pots. Another way of explaining this is that the income flows from a pension pot (dividends in the case of equities and coupons in the case of bonds) will not be reduced by QE. Indeed, if the pension pot contains equities, then the flows could even be higher as a result of increased dividend payments from the boost to the wider economy from QE." 
There you have it. Low interest rates and asset purchases bail out the rich. I hope Krugman reads this and thinks more carefully, because he has a very wide influence in the public debate about these issues.

Fresh Economic Thinking
Krugman vs Bank of England (or QE bails out the rich)
Cameron K. Murray

10 comments:

Ralph Musgrave said...

Scott Sumner and his merry band of market monetarists are all for having central banks print money and buy up privately held assets. But I'm not sure whether they've tumbled to the above obvious point that that process bails out the rich.

Bob Roddis said...

Low interest rates and asset purchases bail out the rich.

I've been saying that for years.

The Rombach Report said...

It would be obvious even with the aid of a low power telescope from the planet Mars that QUANTITATIVE EASING is a bail out of Wall Street at the expense of Main Street.

Ralph Musgrave said...
This comment has been removed by the author.
Ralph Musgrave said...

Stephanie Kelton suggests Bernanke knew all along that QE is defective. See here tweet in which she says Bernanke effectively said “don’t make me do this”:

https://twitter.com/StephanieKelton/status/488727128133742592

I assume she’s referring to Bernanke’s speech here:

http://www.federalreserve.gov/newsevents/testimony/bernanke20120607a.htm

In the speech Bernanke said: “Another factor likely to weigh on the U.S. recovery is the drag being exerted by fiscal policy . . . real spending by state and local governments has continued to decline.” That’s about as blunt as any central banker ever gets.

NeilW said...

What's really interesting is how the transmission from old to young works.

More expensive pension assets are sold to those currently saving for a pension - often via legislation that forces them to save.

That then locks in the lower yield for the recipient and enriches those who were holding prior to the asset inflation.

The Just Gatekeeper said...

@ Ralph

Yes, but unfortunately, its not blunt enough for our brain-dead Congress :(

Unknown said...

"Indeed, if the pension pot contains equities, then the flows could even be higher as a result of increased dividend payments from the boost to the wider economy from QE."


Murray is getting things a bit mixed up. The above quote from the BoE states that dividends increase as a result of improved economic conditions.

Unknown said...

The BoE paper he links to was published two years ago. I remember people discussing it back then.

Matt Franko said...

No way Jose Bernanke knew this....

Perhaps he figured it out by "QE3" but what were his reasonings for QE1 in the first place?

They did about 1.3T in the QE1 that was the previous size of the commercial paper market before the whole "shadow bank" thing blew up so these wizards thought they could just create an additional 1.3T of reserves " for the banks to lend out" and all would be fixed....

He deserves NO credit whatsoever in any of this...